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With higher taxes set to take effect Jan. 1, many investors are preparing to take advantage of this year's lower rates by selling stocks before then. But the question isn't just whether to sell, but also how.

"People will be jockeying to protect themselves from new tax increases," says Ric Edelman, CEO of the Edelman Financial Group, in Fairfax, Va. "I think we're going to see massive trading volume."

The reason: the scheduled expiration of the Bush-era tax cuts, which would bring a spike in tax rates for most investors and those in higher income brackets. The ordinary income-tax rate for the top earners is set to rise to 39.6% from 35%. That ordinary income-tax rate will once again be applied to dividend income, eliminating the current, across-the-board rate of 15%. So the tax on dividends will be equivalent to your ordinary-income rate, anywhere from 15% to 39.6%. The rate for long-term capital gains, meanwhile, is scheduled to rise from 15% to 20%.

On top of those increases, a new 3.8% Medicare-contribution tax will take effect in 2013 under the Affordable Care Act. That tax will apply to ordinary income in excess of $200,000 for individuals and $250,000 for joint filers -- and will be tacked on to dividend income for investors whose earned taxable income exceeds those thresholds.

There's never a clear answer when it comes to anticipating tax-law changes.
Stuart Goldenberg for Barron's

Investors should be able to blunt the impact of the tax increases simply by selling equities that have done well and then buying back those same stocks, or similar ones. But deciding when to do that isn't easy: The fact is that nobody really knows whether Taxmageddon, as the expiration of the Bush cuts has been dubbed, will actually happen. Lawmakers have already extended the cuts once, after all, and in an election year they may well do so again.

That makes planning tricky not just for individual investors, but for financial advisors as well. Perhaps not surprisingly, the professionals are responding to the uncertain environment with a range of approaches.

Mark Sear, a partner at Luminous Capital in Los Angeles, is advising clients to sell stocks by reversing a popular approach to buying them known as dollar-cost averaging. By selling stock in a systematic, gradual manner, sellers lower the chance that they'll cash out a day after the stock crashes, or a day before it spikes.

"I have an unusually high aversion to risk," says Sear, "and that's a way to take out risk."

Others point out that a sell-everything-at-once approach allows investors to wait until the last minute to see what action lawmakers will take, if any. Edelman says he's comfortable with this approach because he expects the market to remain strong between now and the end of the year.

"In this case, we're not anticipating a significant risk on the downside as we approach year end," he says.

Not every advisor agrees that tax concerns should spur investors to sell their winners. The trimming, diversification, and rebalancing that are a standard part of good portfolio management should enable investors to withstand tax increases, says Jeanette Garretty, senior wealth advisor at Wells Fargo Private Bank.

"These are things you should be doing anyway as part of good portfolio management," she says.

In some cases, the looming tax increases have spurred investors to do some overdue portfolio housekeeping, adds Garretty. Many investors have been avoiding selling large single-stock positions for fear of the hefty capital-gains taxes that would result.

"Clients on their own are now saying to me, 'I know I shouldn't have been sitting on this stock for so long, and this might be the time to sell,' " says Garretty.

ONE CAVEAT FOR INVESTORS planning to sell: Don't wait too long. Sell orders should be placed no later than Dec. 14, advises Edelman. Although the tax increases would not take place until next year, investors should allow a cushion for their trades to clear, to correct any trading errors, and to account for end-of-year holidays, he says.

The impending tax increases have generated an enormous amount of media buzz, but they shouldn't unduly influence your investment decisions, some advisors say. Garretty argues that the health of the nation's economy should be investors' top concern.

"Nobody likes paying more taxes, but if the economy is growing, the market is rising, housing is recovering and people are employed, that will have a more significant impact on client portfolios," she says.

While a return to Clinton-era tax rates would affect most investors, there are plenty of cases in which there are no tax benefits to selling. Owners of tax-deferred accounts such as traditional and Roth IRAs, workplace retirement accounts, and annuities aren't immediately affected by the tax increases, since investments in those accounts aren't taxed at all until the money is withdrawn.

Also, taxpayers who aren't in the top bracket will see less of an increase if the Bush tax cuts expire than those in the top tier, particularly with regard to how dividends are taxed. Investors in the 25% bracket, for example, will pay 28% on ordinary income if the Bush tax cuts expire. So the tax on their dividends will rise from 15% to 28%, a much smaller increase than those in the 39.6% tax bracket will see.

Investors in the lowest bracket, meanwhile, have almost nothing to fear; they'll still pay just 10% on capital gains. Finally, investors with an eye more toward estate planning than retirement income don't have anything to worry about. Any inherited stock will be valued at its current market price, not what you paid for it. So if your heirs sell immediately, there will be little to no capital-gains tax owed.

There's another reason to be cautious in selling large amounts of stock. For some, a high volume of selling could have unintended consequences. Profits gained by selling stock could "push you into an alternative-minimum-tax situation," says Mark Luscombe, principal tax analyst with CCH, a Riverwoods, Ill.-based tax publisher and unit of Wolters Kluwer. The AMT will disallow many other deductions, which could negate any tax savings achieved through selling. To avoid such a scenario, it's best to have a tax expert weigh in.

Higher taxes may not be the only risk investors should be worried about right now. Some fear that unethical advisors will see the uncertain environment as a pretext to pick clients' pockets.

Ethical advisors will sell clients' appreciated stocks before the end of the year and then, after realizing the low-tax gains, typically buy back those same stocks or similar ones. Beware of insurance brokers, stockbrokers, advisors, and others pressuring you to sell investments and use the proceeds to buy high-commission products that promise protection against taxes, Edelman advises.

"There is going to be a substantial amount of unethical behavior between now and the end of the year," he says.